BOJ Debt Rollover to Buck Estimate of 18 Trillion Yen Rise

The Bank of Japan’s direct debt purchases from the government may be capped in the next financial year at about the current level, bucking forecasts for an increase of as much as 18 trillion yen ($185 billion).

Direct purchases of one-year bills won’t jump significantly from this year’s 11.7 trillion yen, according to government officials familiar with the matter who asked not to be named, citing policy. That assessment was echoed by people familiar with central bank discussions who asked not to be named because their talks were private.

A big increase in the BOJ’s direct purchases of Japanese government bonds, made by rolling over maturing debt into short-term bills, could fuel speculation that the central bank is financing government spending, the people familiar and the officials said. Royal Bank of Scotland Plc estimated a rollover of about 25 trillion yen in the year starting in April, while Credit Agricole SA and Mizuho Research Institute Ltd. forecast as much as 30 trillion yen.

“Market participants want to know the size of the rollover because it is essential when they forecast how many JGBs will be issued in the market next year,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. “Economists want to know it because it indicates whether the BOJ is financing the government.”

Analyst Speculation

The yield on the benchmark 10-year JGB remained the lowest in the world, trading at 0.655 percent at 9:36 a.m. in Tokyo, up half a basis point from Wednesday. After the BOJ announced unprecedented easing in April, the yield swung from a record low of 0.315 percent to as much as 1 percent in the next month.

The BOJ’s underwriting usually equals the value of the bonds bought in a monthly purchase operation called rinban, according to Bank of America Corp. As the BOJ charted a new course of unprecedented stimulus under Governor Haruhiko Kuroda, policy makers this year merged the rinban with an asset-purchase program. That led to speculation that debt rollovers could be similarly enlarged.

Economists had been split on whether such a move was likely, with analysts at Citigroup Inc. and Itochu Corp., Japan’s third-largest trading house, among those arguing that it was unlikely.

“More than anything, the BOJ hates to be seen as financing government debt,” said Yoshimasa Maruyama, chief economist at Itochu in Tokyo. “The BOJ will keep the size at the same level as this year and shun any action that could be perceived as debt monetization.”

Kuroda said at a press briefing last week that maintaining investor confidence in Japan’s finances is vital. Prime Minister Shinzo Abe is trying to revive the economy while managing a debt burden that is already more than twice the size of gross domestic product.

While Japanese law prohibits the government from borrowing directly from the central bank, the Public Finance Law allows for exceptions.

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